Tough overseas markets and a robust currency are not helping Australian exporters. To cope – and survive – successful export firms are changing. Here’s how. By AMITA TANDUKAR
By Amita Tandukar
Tough overseas markets and a robust currency are not helping Australian exporters. To cope – and survive – successful export firms are changing. Here’s how.
To ensure Australian products remain competitive in unstable overseas markets, top exporters are tweaking their operations by altering staffing levels, investing in branding and rethinking contracts.
The sub-prime crisis concentrated in the US has had a negative impact on export orders in the past 12 months, according to the annual Export Barometer survey released by Austrade and DHL in June, and 42% say the crisis is dampening the outlook for the coming year.
The high Australian dollar is a larger threat. The dollar is affecting profit, prices and sales revenue at two-thirds of the exporting firms surveyed, compared with 50% a year ago. High fuel prices and the cost of raw materials, linked to rising food prices, are following close behind as key concerns.
However the survey reports that 60% of Australian exporters expect an increase in orders in the next year. And small and medium sized businesses are the most confident, with 65% anticipating an increase to orders, compared with just 56% of large businesses.
Austrade’s chief economist Tim Harcourt says exporters are not considering getting out of any markets. “They established a beachhead during the good times,” he says. “Now they will take a hit on their profits and increase spending on innovation to remain competitive.”
SmartCompany spoke to three exporters about their strategies for insulating their companies against the global bad weather.
Gourmet Garden exports a range of 14 long-lasting, tube-packaged fresh herbs and spices to more than 15,000 supermarkets overseas.
It has been a fast rise for Gourmet Garden, launching in 1999. The company employed 10 people by 2001 and by 2008 is now employing a workforce of 140 people in two countries. It is the first time the fully fledged company has been through an economic slowdown.
The company, based on Queensland’s Sunshine Coast, currently gains more than 50% of its revenue from exporting its unique packaging of herbs and spices to New Zealand, Britain, the US and Canada. Asia is the next frontier, with market research showing the growing Asian middle class will soon demand a wider range of food, starting with the key markets of Hong Kong, Singapore and Malaysia.
Craig Agnew, general manager of Gourmet Garden, believes the company’s core business is sound because revenue is growing at 15% and the amount of money people spend on food is not affected by economic conditions. “Also consumer habits are unlikely to change. [Our product] is a lifestyle choice, and people are still going to be cooking at home.”
He says the company founders examined the business model closely when choosing the location of its operating base, including the current scenario of the Australian and US dollars at near parity. “The model has been confirmed,” he says. “Queensland is still the right place to be and the level of volatility in the currency can be accommodated if we achieved the right levels of growth.”
While ruling out shifting the main operations, which employs 120 Australian staff, Agnew has employed an extra 20 staff in the US to take advantage of the strong Australian dollar.
He has also moved to negotiate material contracts denominated in US currency. While all the herbs and spices are still sourced in Australia, the plastic tube packaging is now sourced on a US dollar basis.
Research from Austrade and DHL found 40% of Australian exporters also import goods and so derive some benefit from a strong Australian dollar.
STRATEGY: Increase staff numbers in overseas markets to take advantage of the strong Australian dollar. Negotiate contracts in the destination currency.
The Purist Company
Natural ingredients are the reason consumers of beauty products are drawn to The Purist Company, and rising food prices mean those ingredients are no longer cheap.
Purist was also hit by high oil prices, in the form of more expensive plastic packaging, and was forced to pass those costs on with a weighted 5% price increase for the Australian market in early 2008.
However Catherine O’Keefe, Purist’s general manager, says demand is rising for the “mini-spa” experience of good-quality beauty products at a competitive price, even as spending drops. “During a slowdown people tend to trade down from luxury products to those products,” she says.
The company, based in Sydney with production facilities in the Blue Mountains since 1997, is experiencing 40% revenue growth with distributors in Britain, New Zealand and Singapore. “We can’t keep up with demand,” says O’Keefe, “which is a nice problem to have.”
O’Keefe says she so confident in the medium-term export forecasts that the company has held back on price increases for overseas markets. Purist will start exporting to the US and open a British sales office by the end of the year.
She says the overall strategy relies on solid relationships, which are important when the economy softens. When dealing with distributors, Purist is providing promotional kits and testers to support the brand and is patient with payments. At the other end, long-standing arrangements with suppliers allow the company leeway on out-going payments.
STRATEGY: Build a good relationship with suppliers and distributors in good times. Increase your marketing spend to consolidate the brand.
Speech and language technology company Appen is a truly global company with only 5% of its sales being made in Australia.
Chris Vonwiller, joint chief executive of Appen, says the company is exposed to the softening US economy because it represents 70% of total sales and the US dollar represents 80% of Appen’s settlement currencies. “Export sales last year were strong; our best ever. But there is likely to be a weakening over the next year,” he says.
However Vonwiller is confident that negative effects on exports to France, Belgium, Italy and Scandinavian countries will be limited as the European currency is more stable against the Australian dollar.
He nominates Japan as a hot emerging market with Japanese companies gaining business confidence and foreign companies returning to develop products for the Japanese market. Appen, for example, is assisting development of voice-activated command and control systems for motor vehicles.
Appen’s business model also provides a hedge. It gains about 60% of its business from large multi-national IT clients with investment cycles that are highly susceptible to economic conditions. The remainder comes from less-volatile government contracts; for example, the development of hand-held speech-to-speech translation systems for the US Defense Advanced Research Projects Agency.
Appen purchases raw language data from its suppliers in 30 to 40 countries. Until recently, all the data was processed in a Sydney laboratory. But in the last few years Appen has experimented with outsourcing, opening a large processing centre in Bangalore in 2007. “Outsourcing has got more important as the Australian dollar gets stronger,” Vonwiller says.
The company includes currency forecasting into its business planning and buys forward currency contracts in its three largest trading currencies – the US dollar, the euro and the Japanese yen.
Research by Austrade and DHL shows around a quarter of medium-sized exporters engage in some form of hedging against currency moves, such as opening a bank account in US currency or purchasing products from Australia’s government-run Export Finance and Insurance Corporation. But only 5% of small exporters take those steps.
STRATEGY: Outsource work to cheaper countries. Purchase financial products to reduce risk.